When you apply for a mortgage or remortgage you need to choose which of the available interest rate products you would like. There are broadly 2 types, interest rates which change and interest rates that stay the same.

Here we provide an overview of variable rate mortgages, where the interest rate can change.

What is a variable rate mortgage?

A variable rate mortgage is a type of mortgage where the lender’s interest rate can move up or down.

Compare this to a fixed interest rate mortgage where the rate is set for a period of time and is not affected by interest rate changes elsewhere.

If you have a variable rate mortgage and the interest rate changes your lender will recalculate your monthly payments based on their new SVR.

How does a variable rate mortgage work?

Variable rate mortgages are linked to the lender’s Standard Variable Rate (SVR).

The interest rate you pay will be set by your lender and won’t always rise or fall in line with changes to the Bank of England Base Rate (BEBR).

As the interest rate is variable your repayments will change when the SVR changes.

Who is a variable rate mortgage suitable for?

It can be useful if you are soon to pay off your mortgage or wish to make over-payments or adhoc payments to reduce the mortgage balance.

SVR mortgages don’t normally have any Early Repayment Charges (ERC) so you can pay it off or change lender without large exit penalties.

However, the interest rate is not normally very competitive. Most people would be better off by switching to a new lower rate.

To move away from the SVR over to a more competitive interest rate you have 2 choices:

• Mortgage Product Transfer – Choose a new interest rate from the same lender.
• Remortgage – Choose a new interest rate by moving your mortgage to a new lender.

This is a good time to go back to your mortgage broker to check for the best possible rates.

Other types of variable rate mortgages

As well as the Standard Variable Rate (SVR) mortgage products there are 2 other types of variable interest rate:

• Tracker rate
• Discounted variable rate

Tracker mortgages will follow, or track, a Bank base rate rather than the SVR. This can be the Bank of England Base Rate (BEBR) or one of the major banks. As the BEBR changes your payments are recalculated.

With a discounted rate mortgage your interest rate will be the lenders SVR less a discount percentage. EG. SVR minus 0.25% pa. These products generally last for a set period of time before reverting to the SVR.

Mortgage Early Repayment Charges (ERCs)

Early Repayment Charges are exit fees that apply during the interest rate product term.

You have to pay ERC’s if you want to leave your current mortgage interest deal before the product end date..

You don’t usually have to pay any ERC’s if you’re currently on your lender’s standard variable rate (SVR).